Ind AS 23 – Borrowing Costs Interview Q&A
A. Core Principles & Definitions
Q1: What is the core principle of Ind AS 23 regarding the treatment of borrowing costs for qualifying assets?
What the interviewer tests: The interviewer is checking your understanding of Ind AS 23 and its implications for financial reporting.
- Core principle of Ind AS 23
- Qualifying assets definition
- Capitalization of borrowing costs
The core principle of Ind AS 23 is that borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset. This ensures that the financial statements reflect the true cost of the asset over its useful life.
Q2: Define the term “qualifying asset” and provide practical examples.
What the interviewer tests: The interviewer is testing your knowledge of accounting standards, particularly in relation to capitalizing costs.
- Assets that take substantial time to prepare
- Examples include construction projects
- Relevance to interest capitalization
A qualifying asset is one that requires a substantial period to get it ready for its intended use, such as construction projects or manufacturing facilities. During this time, associated costs can be capitalized, including interest incurred on financing.
Q3: What types of borrowing costs are eligible for capitalisation under this standard?
What the interviewer tests: The interviewer is probing your understanding of accounting standards related to borrowing costs and their treatment in financial statements.
- Directly attributable costs
- Qualifying assets
- Interest expense treatment
Under the relevant accounting standards, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are eligible for capitalization. This includes interest on loans and other costs incurred during the period of construction or production until the asset is ready for its intended use.
Q5: How does Ind AS 23 define and treat foreign currency exchange differences in the context of borrowing costs?
What the interviewer tests: The interviewer is assessing your knowledge of Ind AS standards and their application to borrowing costs.
- Definition of borrowing costs
- Foreign currency exchange differences
- Capitalization criteria
Ind AS 23 stipulates that borrowing costs, including foreign currency exchange differences related to specific borrowings, should be capitalized as part of the cost of qualifying assets during the construction phase. Once the asset is ready for use, any exchange differences are recognized in profit or loss.
B. Capitalisation Rules
Q6: When does capitalisation of borrowing costs begin, and what three conditions must be met?
What the interviewer tests: The interviewer is assessing your knowledge of accounting standards related to borrowing costs.
- Commencement of capitalisation
- Qualifying assets
- Incurred costs
Capitalisation of borrowing costs begins when expenditures for the asset are incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use are in progress. The asset must also be a qualifying asset, which is one that takes a substantial period to get ready for use.
Q7: Under what circumstances should capitalisation be suspended temporarily?
What the interviewer tests: The interviewer is assessing your understanding of capitalisation policies and their implications.
- Economic downturn
- Regulatory changes
- Financial distress
Capitalisation should be suspended temporarily during economic downturns when cash flow is constrained, in response to regulatory changes that affect capital requirements, or when the company is facing financial distress that limits its ability to invest in capital assets.
Q8: When must capitalisation cease for a qualifying asset?
What the interviewer tests: The interviewer is assessing your understanding of capitalisation criteria and the relevant accounting standards.
- Completion of construction
- Asset ready for use
- Transfer of risks and rewards
Capitalisation must cease when the qualifying asset is substantially complete and ready for its intended use, which typically occurs when construction is finished, and all necessary approvals have been obtained.
Q9: How are borrowing costs treated when borrowings are specifically made for a qualifying asset?
What the interviewer tests: The interviewer wants to evaluate your knowledge of accounting standards related to borrowing costs and asset capitalization.
- Capitalization of borrowing costs
- Qualifying assets
- Relevant accounting standards
Borrowing costs incurred specifically for a qualifying asset are capitalized as part of the cost of that asset according to IAS 23. This capitalization continues until the asset is ready for use, ensuring that the financial statements reflect the true cost of the asset including its financing.
Q10: What is the treatment when general borrowings are used to finance a qualifying asset?
What the interviewer tests: The interviewer is assessing your understanding of capitalizing interest according to accounting standards.
- Capitalization of interest
- Qualifying asset
- General borrowings
When general borrowings are used to finance a qualifying asset, interest costs can be capitalized as part of the asset's cost until the asset is ready for its intended use, in accordance with applicable accounting standards like IAS 23.
C. Measurement & Calculation
Q11: How is the capitalisation rate for general borrowings calculated under Ind AS 23?
What the interviewer tests: The interviewer is assessing your understanding of capitalisation concepts and the application of Ind AS 23.
- General borrowings
- Weighted average cost
- Capitalisation rate
The capitalisation rate for general borrowings under Ind AS 23 is calculated as the weighted average cost of those borrowings that are outstanding during the period. This involves determining the interest expense incurred on the borrowings and dividing it by the total amount of borrowings to arrive at a rate that reflects the cost of financing the asset.
Q12: How do investment incomes earned on temporarily invested borrowings affect capitalisation?
What the interviewer tests: The interviewer is testing your understanding of capitalisation policies and the impact of investment income on financial statements.
- Understanding of capitalisation
- Impact of income on borrowings
- Relevance in financial reporting
Investment incomes earned on temporarily invested borrowings can be capitalised if they are directly attributable to the acquisition or construction of qualifying assets, thereby reducing the overall cost of those assets on the balance sheet.
Q13: How should borrowing costs be computed when a project is funded by both specific and general borrowings?
What the interviewer tests: The interviewer is assessing your knowledge of capitalization of borrowing costs and your ability to apply financial principles effectively.
- Identification of specific borrowings
- Weighted average cost of capital
- Allocation of costs
When a project is funded by both specific and general borrowings, I compute borrowing costs by first identifying the specific borrowings directly attributable to the project. The interest on these borrowings is capitalized. For general borrowings, I calculate a weighted average cost of capital and apply it to the portion of the project funded through these borrowings, ensuring a fair allocation of costs.
Q14: If borrowings exceed the amount spent on a qualifying asset, how does that impact capitalisation?
What the interviewer tests: The interviewer wants to evaluate your knowledge of capitalisation rules and their implications on financial statements.
- Understanding of capitalisation
- Impact of borrowings
- Regulatory compliance
If borrowings exceed the qualifying asset amount, the excess cannot be capitalized, which means only the amount spent on the qualifying asset is capitalized. This impacts the balance sheet, as it may lead to higher interest expenses being recognized immediately in the income statement rather than being added to the asset base.
Q15: How should foreign exchange gains that reverse earlier capitalised exchange losses be treated?
What the interviewer tests: The interviewer wants to evaluate your understanding of foreign exchange accounting and its impact on financial statements.
- Reversal of capitalised losses
- Impact on profit or loss
- Compliance with accounting standards
Foreign exchange gains that reverse previously capitalised exchange losses should be recognized in profit or loss in the period they occur, ensuring compliance with relevant accounting standards.
D. Disclosures, Comparisons & Compliance
Q16: What are the key disclosure requirements under Ind AS 23 for borrowing costs?
What the interviewer tests: The interviewer is evaluating your understanding of borrowing costs and the relevant disclosure requirements under Indian Accounting Standards.
- Capitalization of borrowing costs
- Disclosure of accounting policy
- Details of capitalized amounts
Under Ind AS 23, entities must disclose their accounting policy for borrowing costs, the amount of borrowing costs capitalized during the period, and the total borrowing costs incurred, distinguishing between those capitalized and those recognized as an expense.
Q17: How should the capitalisation rate be disclosed in financial statements?
What the interviewer tests: The interviewer is assessing your understanding of financial reporting standards and the importance of transparency in financial statements.
- Understanding of capitalisation rate
- Compliance with accounting standards
- Impact on financial analysis
The capitalisation rate should be disclosed in the notes to the financial statements, detailing the method used for its calculation, any assumptions made, and how it impacts asset valuation.
Q18: How does the treatment of borrowing costs under Ind AS 23 differ from Indian GAAP or ICDS?
What the interviewer tests: The interviewer is testing your understanding of accounting standards and the differences in borrowing cost capitalization.
- Capitalization criteria
- Expense recognition
- Impact on financial reporting
Under Ind AS 23, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalized as part of the cost of that asset. In contrast, Indian GAAP allows for capitalization but may have different criteria regarding the extent of costs that can be included. ICDS primarily emphasizes the expensing of borrowing costs unless specific conditions for capitalization are met.
Q19: How should borrowing costs be treated if they relate to inventories held in large quantities for sale?
What the interviewer tests: The interviewer is testing your understanding of accounting standards regarding borrowing costs and inventory valuation.
- Treatment of borrowing costs
- Impact on inventory valuation
- Compliance with accounting standards
Borrowing costs related to inventories held for sale can be capitalized if they meet certain criteria under accounting standards, such as IAS 23. This means that the costs incurred to finance the inventory can be added to the cost of inventory, thereby affecting the cost of goods sold when the inventory is eventually sold.
Q20: What are the implications of misclassifying interest as capital expenditure on financial statements?
What the interviewer tests: The interviewer is assessing your understanding of financial reporting accuracy and the impact of misclassification.
- Impact on profit margins
- Effect on asset valuation
- Potential regulatory consequences
Misclassifying interest as capital expenditure can inflate asset values and distort profit margins, leading to misleading financial statements. It may also result in regulatory scrutiny and potential penalties for non-compliance with accounting standards.
E. Ethical Considerations & Practical Scenarios
Q21: How would you respond to management's attempt to capitalise interest on non-qualifying routine assets?
What the interviewer tests: The interviewer is evaluating your ethical judgment and understanding of accounting standards.
- Accounting standards compliance
- Ethical considerations
- Communication with management
I would explain that capitalizing interest on non-qualifying routine assets contravenes accounting standards such as IAS 23, which stipulates that interest capitalization is only applicable to qualifying assets. I would recommend documenting my concerns and discussing alternative approaches with management to ensure compliance and uphold ethical financial reporting.
Q22: What audit risks are associated with capitalising borrowing costs during periods of inactivity?
What the interviewer tests: The interviewer is testing your awareness of audit risks and financial reporting standards related to borrowing costs.
- Understanding of capitalisation criteria
- Identification of inactivity risks
- Implications for financial statements
Audit risks include the potential misapplication of capitalisation criteria, as inactive periods may not meet the necessary conditions for capitalising borrowing costs. This could lead to overstated assets and misrepresented financial performance if not properly evaluated.
Q23: A company delays construction due to regulatory issues—should borrowing costs continue to be capitalised?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting principles related to capitalisation of costs.
- Capitalisation criteria
- Regulatory impact
- Interest expense treatment
Yes, borrowing costs should continue to be capitalised as long as the delay is directly attributable to regulatory issues and the company intends to continue the project. This aligns with the accounting standards that allow capitalisation during the construction phase.
Q24: How would you audit the computation of borrowing costs where multiple loans and projects exist?
What the interviewer tests: The interviewer is testing your auditing skills and understanding of borrowing cost calculations.
- Verification of loan agreements
- Allocation of costs to projects
- Compliance with accounting standards
To audit borrowing costs, I would verify loan agreements and terms, ensure accurate allocation of costs to respective projects based on usage, and check compliance with relevant accounting standards such as IAS 23.
Q25: What safeguards can be applied to ensure ethical and accurate reporting of borrowing costs under Ind AS 23?
What the interviewer tests: The interviewer is evaluating your understanding of ethical reporting practices and compliance with Ind AS 23.
- Proper classification of costs
- Consistent accounting policies
- Regular training for accounting staff
To ensure ethical and accurate reporting of borrowing costs under Ind AS 23, safeguards such as proper classification of costs, maintaining consistent accounting policies, and providing regular training for accounting staff are crucial. These practices help to ensure that borrowing costs are accurately capitalized or expensed, reflecting the true financial position of the entity.